IPO Update: SEBI tightens IPO Valuation Scrutiny for Startups eyeing Listingss

According to Reuters, IPO-bound companies are likely to face increased scrutiny over business metrics used for valuations. According to the report, the move has unsettled bankers and companies, who are concerned about delays in listing plans.

India’s push comes after the $2.5 billion IPO of SoftBank-backed payments firm Paytm in November, which sparked criticism of lax oversight of how loss-making companies’ price issues at what some say are exorbitant valuations.

The Securities and Exchange Board of India SEBI raised concerns last month in proposing stricter disclosures, stating that an increasing number of new-age tech firms that “generally remain loss making for a longer period” were filing for IPOs, and traditional financial disclosures “may not aid investors.”

However, even before the proposal is finalised, SEBI has recently requested that many companies have their non-financial metrics – KPIs, or key performance indicators – audited and explain how they were used to arrive at an IPO’s valuation, according to five banking and legal sources.

KPIs for a tech or app-based startup might be figures like the number of downloads or average time spent on a platform – metrics that are disclosed but difficult to audit or link to a company’s valuation, according to sources.

According to the report, SEBI is asking us to “justify the valuation,” and this is “creating uncertainty and increasing the cost of compliance,” according to a lawyer advising several companies considering IPOs.

Regulators in major markets, including Hong Kong, follow practises that subject companies to greater scrutiny regarding their business practises and financials, but they rarely conduct granular checks on valuation metrics.

Reuters obtained a document from February containing SEBI’s remarks to an Indian IPO-bound company, which asked for a “explanation regarding how KPIs form the basis” for determining the IPO issue price, and added that they should be “certified by a statutory auditor.”

PharmEasy, an Indian digital healthcare platform that filed papers for a $818 million IPO in November, is one company that has been subjected to such scrutiny: one source with direct knowledge said the company raised concerns with SEBI about auditing and supplying such details, and is likely to receive some relief.

The increased scrutiny comes as India’s startups and other businesses have become a favourite of foreign investors and have increasingly entered the markets.

More than 60 companies, including high-profile tech ones, made their market debuts and raised more than $13.5 billion last year, with many more, such as ride-hailing firm Ola and hotel aggregator Oyo, still in the works.

The Paytm listing, on the other hand, raised valuation concerns. Following a drop on listing day, the Indian payment firm’s shares are now trading 64% below their issue price, with some fund managers predicting that the incident will “hopefully bring some realism to valuations.”

According to sources, investment bankers from Bank of America and India’s Kotak Mahindra have both expressed concerns to SEBI about the planned scrutiny of IPOs.